The road to RDR

How will the Retail Distribution Review affect the retirement advisory market? Fiona Murphy takes you through this month’s Inquiry

The retirement space is undergoing a serious overhaul this year, with the Retail Distribution Review (RDR) likely to be the biggest game changer. Regulations have set the bar higher for advisers to prove they are adding value for clients, but not everyone is positive about the outcomes.

This month's Retirement Planner Inquiry asks how the roll-out of the RDR will affect the retirement market and addresses the challenges advisers will face.

We sent out an online questionnaire to our readers, with 85 advisers taking part. First, we asked ‘What impact do you think the RDR will have on the UK retirement advisory market?' Almost three-quarters (74%) said it will weaken the market, while 15% said it will strengthen it. Only 11% expect no effect.

When asked to explain, advisers cast the commission ban as the culprit behind market weakness. One said: "Any request for payment for advice will dissuade people from buying pensions."

In addition, a huge 95% of respondents foresee a retirement advice gap, as clients are deterred by fees.

One respondent estimated that the RDR "is not set up for 85% of normal households". Another agreed, saying many "will not pay for advice - financial advice is not a distress purchase, like legal fees or accountancy fees. The client can either take advice and pay, or do nothing".

While some believe the RDR is out of touch with adviser and client needs, others welcome the changes. One said: "We should weed out those who have no motivation to improve their client proposition, and should reduce, if not remove, the product bias we currently have in the market."

Meanwhile, a minority see greater confidence with the market, with widespread qualifications thought to improve the quality of advice.
One torn respondent said: "On a positive note, the client will get a greater deal on his investment as high commissions will not apply, instead an agreed rate.

"However, this could mean adviser and client apathy will rule. Advisers will not look to service a poor return market and clients will not seek advice." Yet one optimist added: "There will always be a need for advice."

Getting ready

With the December deadline in view, we wanted to find out how advisers are preparing for the RDR. The majority (45%) are in the process of implementing plans, but will be ready on time. Nearly a quarter (23%) said they have planned, but there is still a lot to do. A worrying 18% are not prepared at all, while only 14% are fully prepared.

Clearly, getting RDR-ready does not happen overnight. So we asked ‘What have you found most challenging?' Most (40%) said taking the prescribed qualifications. Nearly a third (31%) said moving away from commission. Almost a tenth (9%) said segmenting client base. Finally, a fifth (20%) cited difficulties in implementing a consistent client proposition and uncertainty over fund rebates on platforms and how providers will position their funds.

Again, we put advisers under our microscope. Exams have been particularly stressful, with one adviser saying: "At age 71, I struggle to cope with multi-choice exams. In my day you had to take written exams."

Others found learning difficult as they had not sat exams for years, or saw revision as an imposition on their client time and private lives. One blamed the FSA, who "failed to define elements of the Level 4 requirements in good time, making it difficult to study as the -requirements kept changing".

For those facing difficulties with client segmentation, complaints included inflexibility, discarding "clients that had been subsidised by the practice as a whole" and "segmenting on a financial basis throws up anomalies, such as centres of influence".

Next, we focused on people by asking ‘How much do you think the general public understands about the RDR?' A telling 88% said nothing, with 12% saying little. Equally, 88% of respondents expect an exodus of financial advisers unable or unwilling to move with the sea of change.

When asked to discuss the impact of these issues, advisers predicted troubling trends. There could be a greatly contracted market with orphaned clients, poor retirement decisions and reduction of consumer choice. Others expect a brain drain as veteran advisers opt out.

Improving access to advice

Finally, we asked ‘What can be done to help those who cannot afford to pay for advice?' A number said a free generic advice service should be readily available. Others felt high street banks would sweep up any strays, caveated with concerns for consumers, if this happened. Pro bono work and "local half-day consultancies" were suggested by the socially conscious. Another said advisers should avoid fee stigma with "customer-agreed remuneration".

The RDR has divided the industry, reflected by our survey participants who show varying degrees of enthusiasm for the reforms. While it is undoubtedly a good thing to raise the standards, IFAs envisage unintended results.

Currently, clients may be shielded from the momentum. But in a year's time, retirement specialists may see fierce competition from other organisations, eager to fill the anticipated advice gap.

With nowhere to turn, there needs to be industry innovation to aid the advisers left standing so people can access effective retirement planning.